“The affirmation reflects our view that the risk of a negative regulatory intervention has somewhat reduced, since Orient Finans Bank improved its regulatory capital adequacy ratio and stabilized its open currency position in line with regulatory requirements. The improvement owes to the bank being able to include the full amount of its income earned during 2017 in its regulatory capital (local regulation holds that until an auditor confirms the current year’s earnings, only 50% of earned income can be included in regulatory capital). In addition, the local currency has gradually strengthened since February 2018, which partially mitigates currency mismatches caused by the sharp 48% local currency depreciation on Sept. 5, 2017, when Uzbekistan liberalized its exchange rate regime,” the agency said.

“Since Orient Finans Bank is no longer at risk of violation of regulatory capital ratio requirements, we have revised our assessment of the bank’s capital and earnings to moderate from weak. This still has no affect on the rating. Our projected risk-adjusted capital (RAC) ratio is likely to be 6%-7% over the next 12-18 months, diminishing from the 8.2% as of Dec. 31, 2017, reflecting anticipated business expansion in 2019. At the same time, we expect relatively modest assets and loan book growth in 2018 because the bank will need to adapt to the new exchange rate environment. We also expect that Orient Finans Bank’s growth will likely be supported by solid earnings capacity with annual return on average equity staying close to 30%-35% in 2018-2019,” S&P Global Ratings said in a statement.

“At the same time, we note historical volatility of the bank’s capital buffer, as Orient Finans Bank from time to time is required to be involved in projects run by the Cabinet of Ministers. These projects, due to their large size, lead to material increases in risk-weighted assets, as a result of directed lending or off-balance-sheet exposures. However, these deals are generally backed by guarantees, which in our opinion partially offset credit risk and pressure on the bank’s capital buffer,” S&P Global Ratings stated.

“Although we assume Orient Finans Bank’s total client funds to be relatively stable, we are closely monitoring the bank’s liquidity position. Customer funds decreased by about 15% over the first four months of 2018, largely because of maturities of cash-covered letters of credit,” the statement of the agency reads.

“The stable outlook reflects our expectation that, despite its limited franchise, volatile funding, and challenging operating environment, Orient Finans Bank will maintain its core customer base and solid profitability over the next 12 months,” the agency said.

“We could take a negative rating action if we see that the challenging competitive environment impairs customer relations and causes significant client fund outflow, along with weakening business prospects and squeezed profitability. Signs of deteriorated asset quality far beyond market average levels, which would place the bank’s business stability and compliance with capital adequacy or other prudential ratios under pressure, could also lead to a negative rating action,” the agency added.

“We could consider a positive rating action on Orient Finans Bank if it is able to maintain its RAC ratio sustainably above 7%, with a remote risk of regulatory capital adequacy breaches. Stable business development and funding base, as well as absence of substantial asset quality deterioration, would be required to support a positive rating action,” S&P Global Ratings concluded.